Committee for a Responsible Federal Budget

Taking the Deficit Challenge by Cancelling Stimulus Spending...

Feb 19, 2010

A month ago, we called on those who oppose tax increases to take the spending challenge, showing us how to stabilize the debt only through spending cuts, and those who oppose spending cuts to show us how to stabilize the debt through tax increases. We think it will be quite difficult to get our fiscal house in order without addressing both sides of the budget. But the truth is, we also think it is time to start getting specific on policy ideas -- and are willing to listen to whatever idea anyone has to help the dismal fiscal situation.

A frequent commenter of ours (Big Bureaucracy), for example, proposed a 10-15 percent cut in government bureaucracy. After that, we received another suggestion:

Privatize General Motors. Stop the spending on the recovery act (stimulus package) - whatever is left. Funds from repaid TARP should go back to closing the deficit, not spent on something else.

Let’s see how much these would save…

Privatize GM: After the government converted about $40 billion in GM stock into a 60.8 percent ownership stake in the company, GM now owes the government a total of $5.7 billion. But privatizing the 60.8 percent ownership stake now, when GM still faces weak finances and an uncertain future, would actually increase costs to the government -- given that an ownership sale now would only recoup a fraction of the billions originally invested. And since the CBO calculates everything on a risk-adjusted net present value basis, baseline forecasts already assume the present value of owning GM and that the government will not hold onto the company indefinitely. So unfortunately, this is probably not a money saver.

Stop spending Recovery Act (ARRA) funds: Wednesday was the one-year anniversary of the ARRA, a large package of tax cuts and spending increases expected to cost $862 billion over 10-years. So far, based on our tracking at Stimulus.org, a bit over $300 billion has gone out. Back of the envelope math suggests that stopping stimulus spending tomorrow would save about $550 billion (although the actual number would vary for a number of reasons). A more realistic policy would be to cancel all stimulus spending which has not yet been obligated; we estimate this would save about $230 billion. If you were to also repeal the tax credits made available for 2010 -- including what has already been issued -- this might save another $75 billion or so.

These estimates exclude interest savings, but the also do not account for the drop in demand and output which might occur is stimulus is withdrawn too early.

Don’t spend any more TARP funds: TARP was originally given $700 billion in budget authority – meaning that the Treasury had the ability to spend up to $700 billion if it as deemed necessary given financial market conditions. Currently, about $400 billion remains available.

However, stopping all of TARP’s equity purchases, transfers, and investments doesn’t equate 1-for-1 with savings and deficit reduction (as we’ve noted here and here).

When TARP was created, it was scored on what we refer to as a risk-adjusted present value basis. The calculation itself is quite complicated (see here for a more detailed explanation), but it essentially aims to estimate the net cost of any TARP spending to the deficit, based on the likelihood the loans and investments will be paid/bought back.

In the January baseline, the CBO estimated a roughly 25 percent subsidy rate for all investments made so far. So that means the $300 billion disbursed so far have increased the deficit by around $75 billion. Now compared to spending all of the remaining $400 billion in funds, not spending any would save about $100 billion -- assuming CBO's 25 percent subsidy rate. However, in its baseline, CBO already assumes that $350 billion of that will never be spent. In other words, current deficit measures assume that only $50 billion more in TARP will go out, total. So technically, the budgetary savings of rescinding that would be $25 billion.

 
Ten-year Savings
Rescind all ARRA spending and tax cuts immediately$550
Rescind all unobligated ARRA spending$230
Repeal ARRA tax credits for 2010$75
Don't spend anymore TARP funds$25

In the face of $14 trillion of deficits over the next decade (according to our “current policy” baseline), ending stimulus spending would make only a small dent. There also is a legitimate concern that withdrawing stimulus too quickly could send the economy into a "double-dip" recession.

That said, while these do not come close to solving the problem, they provide significant savings.

We continue to applaud our contestants for doing what to many policymakers are unwilling to do: come up with specific spending cuts and tax increases to begin bringing the debt under control.

As always, we welcome all additional suggestions; and will try to provide estimated budgetary savings for them, if we can.

Feel free to offer your own in the comment queue below.